Adverse trade-offs: India's monetary and fiscal policymakers face a tough task ahead

Subscribe to enjoy similar stories.Policy formulation will see challenges mount in 2026-27 as the effects of the West Asia war unsettle India’s growth picture. The high price of oil has exposed its vulnerability, with the reverberations of every policy action or non-action likely to influence other parts of the economy.Let’s start with monetary policy first. The regime of low interest rates is over and the decision that India’s central bank must take is when—and by how much—to raise its repo rate.

The Goldilocks scenario has turned into a Cinderella syndrome, where all base effects turn negative and inflation pushes aggressively upwards.This is a global phenomenon. Last year, India managed to counter the US tariff blitzkrieg well. But this year’s oil crisis differs; it resembles episodes of the 1970s when the shock was felt across almost every sphere.Inflation will hurt on two fronts.

The first is through crude oil prices. India’s state-run retailers have had to hike the retail prices of fuel, particularly of compressed natural gas, petrol and diesel. Liquefied petroleum gas and aviation turbine fuel prices were hiked earlier.

More hikes are expected to follow over time, as only a part of the increased cost burden of oil marketing companies (OMCs) has been covered so far. Therefore, fuel-induced inflation will have secondary effects, with transport costs likely to rise by 3-3.5%, triggering a tertiary round once companies start increasing prices. Wholesale price index data for April shows an over 8% spike in producer level prices, which will feed into retail prices through the supply chain route.